When the storm is long past, the 5 year—5 year forward TIPS spreads will show 2% inflation

Keynes once said:

Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

Vaidas Urba sent me some interesting quotations.  First Ben Bernanke at the September 16, 2008 Fed meeting, which I propose we call the “Noah’s flood meeting,” after Hawtrey’s famous remark. Here’s Bernanke:

But it was noted that the five-by-five TIPS breakeven remains above a level consistent with long-term price stability.

Vaidas also sent me the following from the ECB:

The long-term forward inflation swap rate remained broadly stable over the period under review, standing at around 2.2% on 5 February. Overall, giving due consideration to both the inflation risk premium and the liquidity premium, market-based indicators suggest that inflation expectations remain fully consistent with price stability.

I also found this from the same ECB report:

At the same time, underlying price pressures in the euro area remain weak and monetary and credit dynamics are subdued. Inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with the Governing Council’s aim of maintaining inflation rates below, but close to, 2%. As stated previously, the euro area economy is now experiencing a prolonged period of low inflation, which will be followed by a gradual upward movement towards inflation rates below, but close to, 2% later on.

There are two very serious problems here.  First, the question of whether Fed policy has long term credibility on the inflation front is quite different from the question of whether inflation is appropriate over the next few years.  I don’t doubt that even during the Great Deflation of 1929-33 most sensible people expected the deflation to end at some point, and prices to level off or maybe even rise a bit. The Fed needs to hit its targets over the next few years, and by that criterion the markets in September 2008 showed that monetary was far too tight.  The Fed should ignore 5 year forward inflation forecasts.  Indeed they should ignore inflation entirely, and focus on NGDP growth, which was falling sharply in late 2008.

The ECB report is even worse.  It actually predicts that inflation will be well below average over the next few years, and then close in on 1.9% a few years down the road. That means they are predicting a procyclical inflation rate, which is a totally insane policy.

In the past Europeans criticized me for suggesting the ECB should deviate from their single mandate to control inflation.  (BTW, it’s a lie to claim the ECB has a single mandate to control inflation.)  OK, so now even the ECB admits their policy will allow inflation to deviate from the target, and then gradually return to the target.  So they are flexible.  That should make me feel better, but then we find out they are flexible in exactly the wrong way.  A flexible inflation targeting regime calls for below average inflation when the economy is booming, and above average inflation when the economy is weak.  They plan to do the exact opposite!

The ECB is basically saying;  “We plan to continue screwing up economic policy for a few more years, but don’t worry, sometime late in the decade we’ll have an appropriate monetary policy.”  I’m sure the Greeks will be glad to hear that.

PS.  I got far behind on comments, but did respond to a few in the past 5 posts this evening.  I also have a Econlog post, if you are interested.

PPS.  Vaidas noticed the Europeans making the same mistake as the Fed made in 2008.  There is an old Chinese curse “May you live in interesting times.”  (I believe it’s apocryphal.)  How about “May you live in a large diverse economy overseen by a ‘teenager’ central bank.”  The Fed was 15 years old in 1929.  The ECB is now 15 years old.

PPPS.  My daughter will be 15 this year.


Tags:

 
 
 

52 Responses to “When the storm is long past, the 5 year—5 year forward TIPS spreads will show 2% inflation”

  1. Gravatar of Rajat Rajat
    5. March 2014 at 18:34

    Scott, I am about the age you were when you had your daughter (and I don’t have children). Any thoughts on the experience you would care to share with a few thousand readers?

  2. Gravatar of Benjamin Cole Benjamin Cole
    5. March 2014 at 19:05

    OT but not: Read the following column by Evans and Novak, conservative columnists, circa July 8 1984. It is worth looking at, if only for the excruciatingly strange ink drawing of the pair of columnists, who indeed look like a couple (those were innocent days, I suppose).

    The column is jaw-dropping entertainment—the pair of right-wingers blame Carter appointees and Volcker for being too tight at the Fed, and even accuse Volcker of “hauteur.” The pair say dangerous deflation is lurking.

    http://news.google.com/newspapers?nid=1310&dat=19840708&id=pJNYAAAAIBAJ&sjid=j-EDAAAAIBAJ&pg=1991,2065470

    Evans and Novak accuse the Fed of having a “monomaniacal” obsession with inflation an would damage the economy or real business people, as opposed to Wall Street bond traders.

    Inflation than was running in the 4-5 percent range. About triple current rates.

    The point is, there was a time when there was not a fright-hysteria attached to inflation. It was not viewed as economic AIDS, but even as something to be tolerated in exchange for growth—even inflation above four percent was embraced by GOP’ers!

    At some point between the mid-1980s and today, the whole economics profession and econo-sphere gravitated towards a near-fixation with inflation—as seen by FOMC board meetings in 2008, when the word inflation would be mentioned more than 500 times in a single session!

    The current hysteria about price stability is seen in the large current roll-call of economists who seem to regard zero inflation as a utopia or goal, regardless of the fact that even measuring inflation over any extended time frame is guesswork. As in, my smartphone is worth what in 1980 dollars? Only a a few million dollars, I would guess…

    Maybe the pendulum will swing back in a few decades…but remember, even the most esoteric of professions seem to fall prey to intellectual fads and pompous pettifogging…

  3. Gravatar of Major_Freedom Major_Freedom
    5. March 2014 at 19:17

    A flexible inflation targeting regime calls for below average inflation when the economy is booming, and above average inflation when the economy is weak.

    The government should increase radio jamming when people are hearing each other better, and decrease radio jamming when people are hearing each other worse.

    Since it is unlikely we’ll be able to stop all radio jamming by tomorrow, the pragmatic solution is to target a particular jamming intensity. Language is sticky.

    With a sudden unexpected collapse in radio jamming, given sticky language, there would be an undue rise in the amount of clear voices which would have the negative consequence of allowing errors caused by previous jamming to be communicated.

    That is an evil thing for people to have to endure. Error communication death spirals will arise. There would be no end in sight to the amount of errors caused by previous jamming that are in need of fixing. There might arise another Hitler over the radio. Prank callers would run wild. People around the world would cower in fear from the now clear voices.

    Oh the horror.

    Oh God, oh God, please stop.

    Amen.

  4. Gravatar of lxdr1f7 lxdr1f7
    5. March 2014 at 19:35

    “Indeed they should ignore inflation entirely, and focus on NGDP growth, which was falling sharply in late 2008”

    Even if the fed responded earlier to the crisis by focusing on NGDP growth wouldn’t that just delay the crisis? Debt to GDP is continually increasing so at some point balance sheets become too poor for banks to lend which means we reach the ZLB anyway?

    Once at the ZLB the fed has to continue higher levels of QE until it has eventually bought every asset that exists and that will be the limit of QE? Or rates can go further and further negative and debt to GDP can increase until we reach incredible levels of mismanagement. 1000% debt to GDP with 25% negative interest rates to compensate lenders for high default rates.

  5. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. March 2014 at 19:49

    Scott,
    I don’t know if you’ve seen this yet. Here’s Krugman on the ECB today:

    http://krugman.blogs.nytimes.com/2014/03/05/lowflation-and-the-two-zeroes/

    “…Is ECB policy constrained by the zero lower bound? You could argue that it isn’t, since it could cut a bit further than it has but hasn’t. I’d argue, however, that if nominal interest rates were much higher “” say, 4 percent “” but the overall euro macro situation were what it is, with inflation clearly below target and unemployment very high, the ECB wouldn’t (and certainly shouldn’t) hesitate at all about cutting rates substantially. It’s only the fact that zero is already so close that makes cutting rates seem like a big deal, an admission that things are looking dangerous (which they are)…”

    The fact that Krugman says “you could argue” is progress. Only a few months ago he declared that the ECB has been in ZIRP for years. Now he admits it isn’t currently, but then goes on to argue that it doesn’t matter anyway.

    There’s been a lot of gloomy articles on the Euro Area lately, far too many to quote. But they all got me thinking about what a Taylor Rule might show. I constructed one based on the 1999 iteration with double the weight on the output gap. I used core CPI and set NAIRU to 8.4% which is what the OECD estimated it was in 2006-2008. The value for the Okun’s Law coefficient comes from the average of 10 Euro Area coefficients from Laurence Ball’s “Okun’s Law: Fit at Fifty?” weighted by NGDP. So here is yoy core CPI (blue) and the Taylor Rule (red) for the Euro Area:

    http://research.stlouisfed.org/fred2/graph/?graph_id=163947&category_id=0

    See that peak in 2011? That was the month of April, the month that the ECB decided to raise the MRO from 1.0% to 1.25%. It of course raised it again to 1.5% in July 2011.

    Here’s the MRO rate and the Taylor Rule residuals around that time period:

    Month MRO TRR
    4/1/2010 1.00 3.4
    5/1/2010 1.00 3.3
    6/1/2010 1.00 3.0
    7/1/2010 1.00 3.0
    8/1/2010 1.00 3.3
    9/1/2010 1.00 2.7
    10/1/2010 1.00 3.0
    11/1/2010 1.00 2.8
    12/1/2010 1.00 2.9
    1/1/2011 1.00 2.6
    2/1/2011 1.00 2.5
    3/1/2011 1.00 2.0
    4/1/2011 1.13 1.4
    5/1/2011 1.25 2.0
    6/1/2011 1.25 2.1
    7/1/2011 1.38 3.0
    8/1/2011 1.50 3.4
    9/1/2011 1.50 3.1
    10/1/2011 1.50 3.4
    11/1/2011 1.38 3.8
    12/1/2011 1.13 3.7
    1/1/2012 1.00 4.0
    2/1/2012 1.00 4.3
    3/1/2012 1.00 4.4

    Notice the ECB was making good progress towards a zero Taylor Rule residual before the fateful policy error caused everything to spin out of control.

  6. Gravatar of TravisV TravisV
    5. March 2014 at 20:26

    David Glasner wrote a great post on Krugman on 2008:

    http://uneasymoney.com/2014/03/04/why-fed-inflation-phobia-mattered

    Does anyone else find Krugman’s influence depressing? “The Fed is powerless, we need bigger fiscal stimulus and bailouts!!!”

  7. Gravatar of TravisV TravisV
    5. March 2014 at 20:30

    Benjamin Cole just wrote a GREAT piece on Robert Novak and Rowland Evans in 1984:

    http://thefaintofheart.wordpress.com/2014/03/05/reflections-in-a-distant-mirror-not

    And David Beckworth just published a great book review / analysis of gold and silver money in National Review:

    http://macromarketmusings.blogspot.com/2014/03/the-gold-standard-was-accident-of.html

    Glasner and Sumner ain’t the only market monetarist historians!

  8. Gravatar of TravisV TravisV
    5. March 2014 at 21:16

    Also, Kenneth Duda (a software engineer) wrote one of my all-time favorite posts in a comments section:

    http://econlog.econlib.org/archives/2014/03/ngdp_targeting.html#319269

  9. Gravatar of Benjamin Cole Benjamin Cole
    6. March 2014 at 00:31

    Travis:

    Thanks!

    And I look forward to reading your comments!

    And you are right about Kenneth Duda–why are non-economists often better than economists at economic analysis?

  10. Gravatar of @YoungEcon @YoungEcon
    6. March 2014 at 05:28

    http://research.stlouisfed.org/fred2/graph/?g=sKM

    So the above picture would not be a cause for concern? What am I missing here? Fuller quote than above of Bernanke:

    “There are positive factors, including the
    significant intermeeting declines in the prices of oil and other commodities, which, if maintained,
    would bring headline inflation down rather notably by the end of the year or next year. The
    dollar has also strengthened. Generally speaking, inflation expectations, though noisy, have
    improved. We have seen a decline in TIPS breakevens and some decline in survey expectations
    as well. But it was noted that the five-by-five TIPS breakeven remains above a level consistent
    with long-term price stability. Nominal wage growth has remained subdued so far, slack is
    increasing, productivity has been strong, and therefore, unit labor costs are well controlled.
    Again, all of these factors are positive in terms of a better inflation picture going forward.”

    There is not different vintages of treasury data right? How could that drop off in the break even rates be seen as good?

  11. Gravatar of Negation of Ideology Negation of Ideology
    6. March 2014 at 05:42

    Travis –

    Thanks for the link to Kenneth Duda’s comment, I hadn’t seen that one. (I’m already familiar with Ben Cole’s excellent comments.)

    Like Kenneth, I am a software engineer. I took economics in high school and college, and read Milton Friedman over the years, and watched his PBS special online. But the financial crisis got me back into this as well.

    As for Ben’s question of non-economists vs. economists – I think in any field sometimes outsiders with no assumptions can get things that insiders miss. However, I still think economists are overall better than laymen at economic analysis.

    I wonder if software engineers, like all engineers, are more likely to look at money as simply a man made tool, like any other tool, not something to be worshiped in some mystical way like the Austrians and other gold bugs. The Keynesians are more rational than the Austrians obviously, but they still seem to be stuck on this zero bound constraint of their own creation. Why is this so complicated? If there is a shortage of dollars, issue more. If there is a surplus of dollars, issue less.

    And how do we know if there is a shortage or surplus? By if the value of the dollar is changing relative to the real economy, or GDP. What is the value of GDP in dollars? NGDP.

  12. Gravatar of ssumner ssumner
    6. March 2014 at 05:44

    Rajat, Thoughts or advice?

    Ben, I think those views may come back when the GOP retakes the White House. They’ll be doves again.

    lxdr. No, the zero bound has little to do with debt, it’s caused by slow NGDP growth.

    Mark, If only Krugman would talk about the implications of the Fed raising rates in 2011. He still doesn’t get it. I’ll do a post.

    Travis, Thanks for all the great links.

  13. Gravatar of John Becker John Becker
    6. March 2014 at 05:54

    I’m sure everything would be just fine and dandy in Greece if they had 1-2% higher inflation.

  14. Gravatar of John Becker John Becker
    6. March 2014 at 05:54

    Darn you stingy ECB for roughly doing your job.

  15. Gravatar of Ben J Ben J
    6. March 2014 at 06:10

    Yes John Becker, because the market monetarist position has always been that higher aggregate demand can fix structural issues. Wait…

  16. Gravatar of Brian Donohue Brian Donohue
    6. March 2014 at 06:15

    Scott,

    Not fully grokking your point on TIPS. FWIW, ‘break-even inflation’ peaked on July 3, 2008 and bottomed on November 28, 2008:

    5 Year 7 Year 10 Year 20 Year

    Tresaury bond yields
    7/3/2008 3.28% 3.59% 3.99% 4.58%
    11/28/2008 1.93% 2.35% 2.93% 3.71%
    Change (1.35%) (1.24%) (1.06%) (0.87%)

    TIPS yields
    7/3/2008 0.56% 1.05% 1.42% 1.98%
    11/28/2008 4.17% 3.78% 2.60% 2.98%
    Change 3.61% 2.73% 1.18% 1.00%

    Break-even inflation
    5 Year 7 Year 10 Year 20 Year
    7/3/2008 2.72% 2.54% 2.57% 2.60%
    11/28/2008 (2.24%) (1.43%) 0.33% 0.73%
    Change (4.96%) (3.97%) (2.24%) (1.87%)

  17. Gravatar of Daniel Daniel
    6. March 2014 at 06:29

    https://twitter.com/esoltas/status/362294682568499203

    John Becker, you are a total moron.

  18. Gravatar of @YoungEcon @YoungEcon
    6. March 2014 at 07:20

    Brian,

    To be fair you should stop at mid Sept rather than November, since Sept 16 is when the Bernanke made that statement. That doesn’t make things much better, since the breakeven fell by about 1.5 percentage points between the beginning of July and mid Sept. See the link to the graph in my above post.

  19. Gravatar of John Becker John Becker
    6. March 2014 at 07:28

    Wow Daniel good point. An economy run on a banana republic level actually had it’s economy contract after years of being allowed to borrow at the same rates as Germany. I submit that you are the moron for thinking that NGDP could solve the problem. What does higher NGDP do for 10 year borrowing costs, unsustainable pension schemes, low productivity, inability to collect taxes, wasteful spending projects and make work programs, and such tedious regulation that you have to submit a stool sample to start an online company. Yeah higher NGDP is gonna solve all that.

  20. Gravatar of John Becker John Becker
    6. March 2014 at 07:30

    Daniel,

    If you say you’re an engineer I’m worried for whatever you build. Oh don’t worry about the rotting foundation (bad economic structure), we’ve met our target for height (NGDP).

  21. Gravatar of Daniel Daniel
    6. March 2014 at 07:59

    Typical austro-obscurantist bullssh*t – because the supply-side is full of problems, let’s pretend the demand-side is irrelevant.

    But hey, I should have realized what a moron you are when you went on and on about how you can’t see the usefulness of the AD-AS framework. And you obviously still don’t get it, otherwise you wouldn’t be spouting such nonsense.

    Saying aggregate demand issues don’t matter is like saying there’s no difference between a dead-end low-wage job and no job at all.

    What’s worse – a decade of 10% unemployment, 1% real growth and 4% inflation – or a decade of 20+% unemployment and negative growth ?

    Are you even capable of grasping the issue here ?

  22. Gravatar of John Becker John Becker
    6. March 2014 at 08:14

    Daniel,

    Obviously for Greece they’d take your first option and that’s what I’d recommend for them. You missed what I was saying. I’m saying that that wasn’t an option for them. All the name calling in the world doesn’t make your arguments any better.

    There’s no such thing as aggregate supply or aggregate demand. Those concepts are misleading and have to be handled with extreme care.

  23. Gravatar of TravisV TravisV
    6. March 2014 at 08:15

    Mark Sadowski,

    See your comment here:

    https://www.themoneyillusion.com/?p=26274#comment-321895

    You might have accidentally linked to the wrong (2005) FOMC meeting. There is no mention of “Parry” in those minutes……

  24. Gravatar of Daniel Daniel
    6. March 2014 at 08:19

    John Becker,

    I’m saying that that wasn’t an option for them.

    Did the ghost of Mises whisper that in ear ? Or is this another example of praxeology (aka “let’s make stuff up”) in action ?

    There’s no such thing as aggregate supply or aggregate demand.

    That only speaks of your intellectual limitations.

  25. Gravatar of John Becker John Becker
    6. March 2014 at 11:13

    AD/AS is just about the most intellectually lazy way to think about an economy imaginable.

    How in the hell would higher NGDP have allowed the Greek government to pay their bills? Keep in mind that we are only talking about marginally higher here because the monetary policy had to be appropriate for all of Europe and not just one state that would want all their debts inflated away.

  26. Gravatar of CA CA
    6. March 2014 at 11:41

    “There’s no such thing as aggregate supply or aggregate demand.”

    Right. And I’m sure that when it’s raining you tell your wife, “oh look, it’s individual-droplets-of-water-falling outside.”

  27. Gravatar of Mark A. Sadowski Mark A. Sadowski
    6. March 2014 at 11:56

    TravisV,
    Thanks for catching that. The correct link is here:

    http://www.federalreserve.gov/monetarypolicy/files/FOMC19960703meeting.pdf

    Yellen’s remarks are on pages 42-45.

  28. Gravatar of W. Peden W. Peden
    6. March 2014 at 12:29

    CA,

    There is no such thing as droplets of water, you socialist.

  29. Gravatar of Rajat Rajat
    6. March 2014 at 12:45

    Ha ha, either way…!

  30. Gravatar of ssumner ssumner
    6. March 2014 at 13:04

    John Becker, You said;

    “I’m sure everything would be just fine and dandy in Greece if they had 1-2% higher inflation.”

    Are you just pretending to be clueless, or is this really how you think about economics?

    Brian, That data shows inflation expectations falling sharply, which is exactly my point.

  31. Gravatar of Vaidas Urba Vaidas Urba
    6. March 2014 at 13:43

    Brian Donohue,

    5y5y breakevens Bernanke referred to in his speech are basically calculated by substracting 5y breakevens from 10y breakevens.

  32. Gravatar of Brian Donohue Brian Donohue
    6. March 2014 at 14:15

    @YoungEcon, Vaidas,

    Thanks. OK, I know I’m roughing it out here, but would the 5y5y breakeven calculation look something like this?

    On July 3rd, the 5-yr breakeven was 2.72% and the 10-year was 2.57%, so:

    [(1.0257 ^ 10) / (1.0272 ^ 5)] ^ (1/5) – 1 = 2.42%

    breakeven inflation in years 5-10.

    On November 28th, the 5-yr breakeven was -2.24% and the 10-year was 0.33%, so:

    [(1.0033 ^ 10) / (0.9776 ^ 5)] ^ (1/5) – 1 = 2.97%

    breakeven inflation in years 5-10.

    So, even through the near-term breakevens crashed, the ‘5-year forward 5-year breakevens’ actually went up. Is this what Scott is saying?

  33. Gravatar of Major_Freedom Major_Freedom
    6. March 2014 at 14:44

    Daniel:

    If an individual firm or industry should incur losses for being badly managed, so should large swaths of a country incur losses for the same reason.

    Or maybe every badly managed firm should be assurred of a guaranteed nominal income growth. Don’t want to encourage new Hitlers to arise.

  34. Gravatar of Major_Freedom Major_Freedom
    6. March 2014 at 15:00

    CA:

    I think what Becker is saying is that there is no such thing as AD or AS. That is actually true.

    What people are actually referring to when they use these terms, intentionally or otherwise, are the totality of all individually driven sums of spending and producing, respectively.

    When people say there is an AD problem, they are really saying that they believe other individuals are not spending money as much and as fast as they should be spending.

    When the argument is rephrased like that, do you notice how different your thinking becomes not only definitionally, but content wise as well?

    Austrians argue that if you’re going to explain why things are taking place, you have to use the right principles and foundation. For Austrians, it is individual action, and the categories of action that we call economic laws.

    If you have read anything Austrians have been saying prior to 2007 and post 2007, you will find that they have generally been correct about the real state of the economy. They anticipated, not predicted, that the government would try to reinflate the economy more than it should, regulate more than it should, and as a result, hamper true economic recovery, which in fact requires economic freedom at the individual level. After all, the economy IS nothing but all of us individuals.

  35. Gravatar of Major_Freedom Major_Freedom
    6. March 2014 at 15:09

    Daniel:

    “Typical austro-obscurantist bullssh*t – because the supply-side is full of problems, let’s pretend the demand-side is irrelevant.”

    Typical money-socialist obscurantist gobbledygook. Let’s pretend that the money problems are due to something other than the fact that money is controlled socialistically.

  36. Gravatar of TravisV TravisV
    6. March 2014 at 15:58

    Major_Freedom,

    Your views are so dark and pessimistic. You should give Friedman / Sumner optimism a try sometime!

    Look around! Can’t you see the neoliberal revolution happening all around you?

    http://www.econlib.org/library/Columns/y2010/Sumnerneoliberalism.html

    http://reason.com/archives/2013/01/22/the-neoliberal-revolution/print

  37. Gravatar of Major_Freedom Major_Freedom
    6. March 2014 at 16:38

    TravisV:

    I am only dark and pessimistic towards initiations of force, against either person or property.

    I am very optimistic about the ability of humans to learn and adapt. I can see that you are being very dark and pessimistic towards the idea of more than incremental changes for the better.

    I am actually not in favor of neoliberalism. I consider it to be also grounded on violence. I favor a private law society based on individual property rights.

    Ultimately, what gives me hope and reassurance is that I have the ability to know what’s right even if the entire rest of the world is wrong. This is not to say that I am purposefully settling on that as some sort of standard, but rather, my philosophy is that truth can only be known by the individual, and that includes me.

    Friedman was, and Sumner is, extremely pessimistic towards humanity. So much so that while they showed some signs that they knew the truth, they nevertheless advocated for a sub-standard course of action, on the basis that they viewed the general population as intellectually incapable of knowing any better.

    It is precisely why Sumner displays animosity towards “ideologues.” Ideologues like me are maximally optimistic about what is possible for mankind. We’re going about things the wrong way because we believe in something that is too good for mankind to handle.

    TravisV, you have it completely backwards. It is you and Sumner who are dark and pessimistic. I am incredibly optimistic, which is why I am going out of my way so often to tell you how dark and pessimistic your worldviews are.

    I don’t appreciate being told to delude myself and feel happy and optimistic about your ethics and view of mankind which is at root depraved and sickening.

    I believe the main reason, if not the only reason, why you keep harping on me to be optimistic, is because you’re trying to cover up your own dark and pessimistic tendencies. It’s what is known as “reaction formation.” I suggest you Google that phrase, and worry about yourself more than you worry about me.

  38. Gravatar of @YoungEcon @YoungEcon
    6. March 2014 at 16:58

    Brian, Vaidas,

    Yes years 5 through 10 looked constant in Sept 2008, but up to 5 didn’t look so good.

    Brian,

    Here is your calculation over a longer time span. Nov 2008 was a blip, before a crash. Sept. 2008 was fairly constant.

    http://research.stlouisfed.org/fred2/graph/?id=DGS5#

    Note though using logs you could just calculated 2*(10 year breakeven) – 5 year breakeven.

    2.57*2-2.72=2.42

    .33*2–2.24=2.9

    I included both calculations on the graph. They might be up to 10 basis points apart at some points.

  39. Gravatar of @YoungEcon @YoungEcon
    6. March 2014 at 16:59

    Messed up the link above, here is the right one:

    http://research.stlouisfed.org/fred2/graph/?g=sMW

  40. Gravatar of TravisV TravisV
    6. March 2014 at 17:14

    Major_Freedom,

    China, India, and numerous other countries have become less statist and embraced neoliberalism. The standard of living in China is far higher than it was 20 years ago and it will continue to prosper far into the future.

    Think about how poor China was century after century until it embraced neoliberalism. It’s astonishing how quickly it’s prospered!

    Why don’t you celebrate that? Have you read any of Deirdre McCloskey’s brilliant insights?

    Living standards throughout the planet–particularly in China and India–are going to be far far far higher 20 years from now. Can’t you see that? Isn’t it great?

    You’re deeply dark and pessimistic. You think the U.S. and China are heading toward a cliff when just the opposite is the case. Why live in a pessimistic fantasyland when reality is so optimistic?

  41. Gravatar of Major_Freedom Major_Freedom
    6. March 2014 at 18:02

    TravisV:

    I do not ignore or discount the partial, limited increases in economic freedom that have occurred over the last few generations. I am incredibly happy about these turn of events.

    It is because of laser like focuses on violations of economic freedom that such events have been made possible.

    You are incredibly dark and pessimistic about the possibility of a superior alternative. You exaggerate the positives and discount the negatives, whereas I exaggerate the negatives and discount the positives. I think my approach is more effective in doing what you are passive about, which is basking in the outcomes of what others more driven and radical than you are bringing about.

    I do not have the positive and optimistic outlook on coercion and violence as you do. I find happiness and fulfilment in struggling to increase freedom, not in ignoring the coercion and being happy with the limited freedoms we do have.

    I find maximal joy and hope in what humans CAN do, not what humans HAVE done. The past is done and over with. Tomorrow is coming at us and that is where I put my mind.

    Yes, I do believe that IF, and let me emphasize the IF as much as I can here, IF central banking is not abolished, THEN I cannot put my emotions as the ground for truth. Reason prevails, and reason dictates that a cliff would be unavoidable.

    This is not being dark and pessimistic about the future, it is realizing cause and effect, where the cause isn’t a necessary course of action, but a choice.

    It is worse to be optimist about a deeply flawed worldview, than pessimist about it. Marxist utopians were supremely joyous and happy and optimist about what central ownership and/or control of the means of production would bring. They were honestly happy and eager about it.

    Being optimistic for optimism’s sake is a path to failure and dejection.

    I do not want to be profoundly dark and pessimistic like you about what humans are capable of doing, notwithstanding what humans have done in the past.

    Why do you live in a pessimistic fairytale land of what humans are capable of, when the reality of what humans are capable of is so optimistic?

  42. Gravatar of Tom Brown Tom Brown
    6. March 2014 at 19:20

    John Becker, Daniel, etc.: folks talking about Greece. You might be interested in this thread on David Glasner’s site recently. Here’s David:

    “Tom, I think he makes some good points. The way I would paraphrase what he is saying is that Greece and perhaps certain other countries now in the Eurozone are so mistrusted that if they were to leave the euro and set up their own currencies, there would be a substantial risk of collapse in the absence of very draconian exchange controls which would violate obligations under European Union. In addition, the mechanism by which a country could withdraw from the euro is so fraught it may simply not be feasible. It is far more difficult to withdraw from the euro than from the gold standard, since countries under the gold standard still retained national currency units. National currency units no longer exits for countries in the Eurozone. The problems of the southern European countries, and especially Greece, could be mitigated by a sufficiently loose and inflationary policy by the ECB, but Germany will not allow the ECB to provide the necessary inflation to allow the southern European countries to reach a high employment equilibrium.”

    The thread started here:

    http://uneasymoney.com/2014/02/13/what-does-keynesian-mean/#comment-44564

    David’s comment above concludes it.

  43. Gravatar of TravisV TravisV
    6. March 2014 at 19:30

    Major_Freedom,

    I don’t have much influence and you don’t have much influence.

    It’s extremely rare for any one individual to have a substantial impact on what happens in this world.

    But Sumner’s done it! He’s gone from obscurity to hero thanks to the Internet and the unique brilliance of his insights.

    He’s changed the way elites think about macroeconomics. As a result, a (1) backwards-looking obsession with interest rates is being replaced by a (2) forward-looking method that respects the EMH.

    Thanks to Prof. Sumner, the world will be far more prosperous and stable 20 years from now than it would have been otherwise.

    Isn’t that great? You can’t possibly write off Sumner’s achievement as “incremental,” that’s ridiculous!

  44. Gravatar of TravisV TravisV
    6. March 2014 at 19:47

    Major_Freedom,

    Take a step back. Think about (1) the ascendance of Keynes until Milton Friedman came along and exposed the hollowness of Keynes’s arguments. The neoliberal revolution ensued.

    Think about (2) the 2009 ascendance of Krugman and the notion that we need a huge government and massive bailouts in order to stabilize things. Look at how Sumner and Glasner have exposed the hollowness of those arguments and resurrected the brilliance of Hawtrey and Cassel.

    Given that Krugman exists, why don’t you view Sumner as an ally rather than an enemy?

  45. Gravatar of Major_Freedom Major_Freedom
    6. March 2014 at 20:18

    TravisV:

    “I don’t have much influence and you don’t have much influence.”

    You have influence of the people around you. Those people who are influenced also have influence of the people around them.

    If you instead think more positively about your own influence, you will motivate and inspire those around you. You might get a lot of animosity due to those people’s own intellectual and emotional failings, but in the long run humans tend to learn. It’s why we’re not all still living in the caves under ruthless warlords, while people are “happy” like you about it, because heck, they might have lived in the mud instead.

    “It’s extremely rare for any one individual to have a substantial impact on what happens in this world.”

    Only if that idea is accepted.

    “But Sumner’s done it! He’s gone from obscurity to hero thanks to the Internet and the unique brilliance of his insights.”

    Huh? Hero? Brilliant? That’s laugh out loud funny.

    He’s a garden variety monetary socialist with a minor tweak in the rate at which the money printing button is pressed.

    The only reason his ideas are in any way attractive to the central bankers, is to the extent his ideas give them more legitimacy in their coercive hegemony. That’s it. He wanted more inflation since 2008, and that’s music to the ears of those who benefit from the inflationary system at the expense of everyone else.

    “He’s changed the way elites think about macroeconomics. As a result, a (1) backwards-looking obsession with interest rates is being replaced by a (2) forward-looking method that respects the EMH.”

    False on both counts.

    (1) Interest rates are a crucial regulatory mechanism in how the economy functions. Ignoring them is a bad idea. Manipulating them, purposefully or not, with inflation is an even worse idea.

    (2) EMH is flawed. If everyone respected EMH, the markets would collapse. It is only to the extent that people disrespect EMH, that we have financial markets.

    “Thanks to Prof. Sumner, the world will be far more prosperous and stable 20 years from now than it would have been otherwise.”

    False again. Thanks in small part to him, and in large part to monetarist and keynesian poison influencing government, we are now, and might likely will be if central banking continues, far more poor than we otherwise would have been in a free market.

    Your counter-factual is not the only one. My counter-factual would have everyone significantly better off in the long run.

    People like Sumner are destroyers of society. It is only to the extent that they don’t have influence, is the world a better place.

    “Isn’t that great? You can’t possibly write off Sumner’s achievement as “incremental,” that’s ridiculous!”

    Of course I can write it off as incremental. Going from 2% price inflation during a bust, to 5% or 10% price inflation during a bust, is not only incremental, but incapable of stopping the accumulation of errors that no amount of inflation would be able to reverse.

    “Take a step back. Think about (1) the ascendance of Keynes until Milton Friedman came along and exposed the hollowness of Keynes’s arguments. The neoliberal revolution ensued.”

    You think about free market economists who exposed Milton Friedman’s and Keynes’ arguments.

    “Think about (2) the 2009 ascendance of Krugman and the notion that we need a huge government and massive bailouts in order to stabilize things. Look at how Sumner and Glasner have exposed the hollowness of those arguments and resurrected the brilliance of Hawtrey and Cassel.”

    Look at how better economists have exposed the flaws in Sumner’s arguments.

    “Given that Krugman exists, why don’t you view Sumner as an ally rather than an enemy?”

    Because he is an ideological enemy of peaceful co-existence.

    He may act like an anarchist, in that he doesn’t steal other people’s wealth, or threaten them with violence if they don’t pay him a portion of their salary in “Sumner Dollars”, or threaten them with violence if they choose to hire a different private security guard than what he prefers, all of which is the only reason why he is not being warned of any serious consequences, but what he preaches, which is very different from what he does, is poison. He “advocates” for initiations of force, in the name of “pragmatism” and “political feasibility.”

    For that he is an intellectual enemy of peaceful, civilized life.

    I would much rather live among people who do not support me being shot for disagreeing with him about what money I ought to use. Do you understand?

  46. Gravatar of Major_Freedom Major_Freedom
    6. March 2014 at 20:26

    TravisV:

    The fiat money system is breaking down before your eyes.

    Bitcoins and other crypto-currencies are arising organically in the market because of the failings of fiat currencies.

    This is not a coincidence.

  47. Gravatar of TravisV TravisV
    6. March 2014 at 20:45

    Major_Freedom,

    If the probability of apocalypse were truly increasing, then forward-looking markets would be crashing. 30-year TIPs spreads would be soaring through the roof. But they’re not.

    Anyone with the slightest understanding of the efficient market hypothesis can see that the apocalypse you keep warning about ain’t gonna happen.

    You think price signals are unreliable indicators of the future? And you sincerely believe you’re a free-market advocate? You have got to be kidding me!

  48. Gravatar of Major_Freedom Major_Freedom
    6. March 2014 at 21:35

    TravisV:

    1. I’m not predicting anything, let alone an “apocalypse”, whatever that means. Did you not understand what I actually wrote above?

    2. Understanding EMH does not enable you to make predictions of future human choices. Weimar bond prices couldn’t predict what Hitler did.

    3. First, price signals are not free market driven. Second, you’re reasoning from a price change. Prices pre-financial crisis did not convey human knowlegde and actions post crisis. Prices today do not convey information of future knowledge and actions. Third, you don’t have to believe prevailing prices are “reliable indicators” of the future, before you are justified in calling yourself a free market advocate, any more than you are not required to believe that jammed radio signals are “reliable indicators” of what people are actually saying, before you can justifiably call yourself an advocate of unjammed radio signals.

    What you are doing is pretending that the Fed is not distorting prices, so as to justify on your mind why you nevwrtheless support it, so as to continue the price distortions, and then claim anyone who thinks the Fed distorts prices is anti-market. That is not unlike a thug who beats his victim every day, and then, in response to criticisms of others, claim “Oh you just believe people are weak. You’re no staunch defender of the human spirit! You seem to believe humans can’t even move freely in self-interested ways!”

    TravisV, please underatand and believe me when I say that I have heard virtually every anti-market argument in the book. You’re not telling me anything I haven’t many times before and refuted many times before. I’ve chosen to educate myself on the philosophy and psychology of anti-capitalism in all of its main forms. One of the more head shaking things I witness are people who think and talk like you do, who believe they are advancing new arguments that have not long been debunked many times over.

    You’re shooting spitballs. Instead of trying to convince me to support initiations of violence, which I will not do so don’t bother continuing in trying, you should instead approach me like anything and everything we disagree about, has a non-government, pro-peace solution.

    Consider what you’re asking to support in the positive sense, and not relative to some worse standard like “Support Hitler because Stalin’s worse”. If what you’re asking me to support requires, assumes, or otherwise implies government pointing guns at innocent people, then trust me when I say that I will just think of you as just another veritable psychopath who is in desperate need of an education, in compassion, reason, and economics.

    I will only sanction your BS if it is based on peace. I.e. reason, not violence.

    Are you capable? Is anyone on this insane asylum blog capable? I’ve yet to see it.

  49. Gravatar of Brian Donohue Brian Donohue
    7. March 2014 at 05:47

    @YoungEcon,

    Very cool. Thank you. So, if we’re talking about long-term deflation fears, that didn’t bottom out until the very end of 2008.

  50. Gravatar of Brian Donohue Brian Donohue
    8. March 2014 at 08:54

    Scott,

    The forward breakeven discussion and the recent “5-years on crisis review” theme caused me to poke around a bit.

    What I see is that “breakeven forward inflation expectations” have been pretty amazingly stable, generally flattish and between 1.5% and 3%, and mostly between 2.0% and 2.5% since at least 2004 (when 20-year TIPS were first issued.)

    As late as October 1, 2008, this was the case (a bit low then, 1.0%-2.4%.)

    Then things went kablooey, culminating on November 28th, with 5-year breakevens at -2.24% while 7-10 year forward rates were +4.56%.

    Suddenly, on December 1, 2008, there was easily the most striking one-day ‘normalization” of forward breakeven rates ever (also, a big market crash.) There is nothing close to this movement in the history of breakevens.

    Expectations were still low (0%-1%) but they drifted up to basically normal range in the first of 2009 and have been pretty well-behaved since then.

    All things considered, I think the Fed did a decent job in the crisis. Not sure what happened on 12/1/08, but here’s a speech Bernanke gave in Texas that today that reads pretty well today:

    http://www.federalreserve.gov/newsevents/speech/bernanke20081201a.htm

  51. Gravatar of ssumner ssumner
    8. March 2014 at 11:21

    Brian, The data on TIPS spreads suggests money was far too tight by late September. And yet the Fed argued that the real risk was high inflation. Of course they were wrong and the markets were right.

    The December 1 change had to do with an accounting issue, I believe they shifted the TIPS estimates from one type of a bond to another. Mankiw did a post on it, if I’m not mistaken.

  52. Gravatar of ssumner ssumner
    8. March 2014 at 11:27

    Brain, That speech certainly doesn’t “read pretty well today.” It’s a disaster. He describes an economy in free fall, and then discusses things the Fed might want to do in the future. Further cuts in the fed funds target, QE, etc. WELL WHY WASN’T HE ALREADY DOING THEM AT THE TIME OF THE SPEECH?

Leave a Reply